A Dispirited Fed Chairman Emerges From Jackson Hole

"[M]ost of the economic policies that support robust economic growth in the long run are outside the province of the central bank." — Fed Chairman Ben Bernanke.

A thoroughly chastened and discouraged Fed Chairman Ben Bernanke gave his annual speech last Friday at the Fed conference in Jackson Hole, Wyoming. After reading this year's speech, and then re-reading last year's speech, I found his tone gloomy and dispirited. This is a far cry from the younger, more confident Ben Bernanke who in 2002 told Milton Friedman at his 90th birthday party that Milton was right about the Fed causing the Great Depression and "we won't do it again." Of course Milton was right about the Fed but for the wrong reasons, which could be part of our problem.

If you have followed Bernanke's speeches over the years, at least since the Crash of '08, you will get a flavor of the man. Like all Chairman his tone has to be sober, reservedly confident, and in control. Unlike The Oracle, Chairman Alan Greenspan, who gave little clarity or direction at all, Dr. Bernanke has tried to be more "transparent" in communicating Fed policies. It is my impression that while he has tried to exude confidence, he is now clearly discouraged. As well he should, since none of the Fed's "suite of tools" have worked as intended and almost every forecast the Fed has given since the Crash has been wrong.

This malaise seems to have infected the leaders of other central banks as well as they convened with the Chairman last weekend. Perhaps there is something in the air at Jackson Hole.

Dr. Bernanke is always quick to remind us that the actions of the Fed were responsible for saving the world and averting disaster at the critical moment during the "Panic." It got him on the cover of Time. The only problem is that he has no way to prove that. The few papers I have seen on the topic (Blinder& Zandi; Brave and Genay; Gagnon, Raskin, Remache & Sack) have not been very convincing. Of course our own David Stockman has plenty to say about that topic (here and here).

If we even give him that point for the sake of argument, then nothing since then has worked. It's got to be discouraging for him.

This latest speech is Exhibit No. 1.; he announces basically nothing new. It is what he didn't announce that was significant, much to the regret of an anxious Wall Street.

What has changed is his tone. Here are some quotes I picked out of this year's and last year's Jackson Hole speeches to give a comparison in his tone and outlook. I don't think I'm cherry-picking comments, but these quotes do illustrate my point:

I will let you go back and read all the forecasts made last year that were wrong, but here is an example: "Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place." I need not remind you that industrial production has fallen for the past 13 months. Also recall that the big fear last year was deflation and Dr. Bernanke opened the door to QE2. Their one "triumph" over the year: they licked the deflation thing – July 2011 CPI +3.6% and PPI +7.2%.

This year Dr. Bernanke expressed the Fed's dismay for so badly misjudging the economy and the forces behind our boom and bust: "we have learned that the recession was even deeper and the recovery even weaker than we had thought." That kind of misjudgment is what destroy economies.

It gets worse though.

The Fed has long maintained, and Dr. Bernanke reiterates it in this speech, that the cause of the recession was the financial "meltdown." That is akin to saying the sickness of our patient is due to the fever rather than its cause. The Fed as an institution has no clue why we have economic malaise. If it did perhaps there is something they could do to help us recover.

What caused our recession/depression is the Fed itself. By manipulating the money supply they create cycles that lead to false booms based on money steroids, and we go bust when the money drug is withdrawn. The result is a huge supply of things people don't want (this time, houses and commercial real estate) and the burden of debt. This is the Forever history of the boom-bust cycle. This is something the Austrians figured out a long time ago (Mises, Theory of Money and Credit, 1912).

Yet Dr. Bernanke, after all the Fed's failures, says ingenuously:

The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability. Low and stable inflation improves the functioning of markets, making them more effective at allocating resources; and it allows households and businesses to plan for the future without having to be unduly concerned with unpredictable movements in the general level of prices. The Federal Reserve also fosters macroeconomic and financial stability in its role as a financial regulator, a monitor of overall financial stability, and a liquidity provider of last resort.

Ignore for the moment that this sounds exactly like central economic planning. This statement is exactly the opposite of what they are achieving.

Here though, is the frustrating part for Dr. Bernanke personally:

Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view ...

Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.

I would like to think this is a revelation by Dr. Bernanke, leading him to question his econometric neo-Keynesian-Monetarism, but instead he has concluded that "economics" just doesn't work this time. He acknowledges that "normally" economies can recover by themselves, which they do. He is puzzled though why this "virtuous circle" of restoration is not occurring now. It is "unusual" he says. It is unusual if you don't understand why it's happening.

The rest of his speech is devoted to chastising our politicians for being fiscally irresponsible.

We are witnessing the failure of contemporary economics on a grand scale. These policies are being played out on the worldwide stage much to the same result. Europe is experiencing a culmination of years of failed policies.

What concerns me greatly is the next step. It doesn't look likely that the Fed will embrace Austrian theory economics.

Instead they will try the same things again. ZIRP has been continued to 2013. Perhaps the Fed will reduce interest on excess reserves, or not pay interest at all, in order to encourage banks to lend. Perhaps it will pursue "Operation New Twist" and roll its portfolio over into even longer term maturities. Perhaps it will reduce bank reserve requirements temporarily (assuming it could get by Dodd-Frank and Basel III).

Then there is QE3, more monetary stimulus through direct injections of cash into the financial markets.

If there is one thing that Dr. Bernanke believes in it is his Monetarist view of the Great Depression. That view says the Fed caused the depression because it reduced money supply which dried up credit. The other view that Dr. Bernanke believes, a neo-Keynesian view, is that by pushing money into the economy in times of a "liquidity trap" people will spend the money, stimulate new economic activity, and thus, a recovery. Dr. Bernanke understands that QE is a last option monetary weapon and that it should not be overused, lest "inflation" get out of hand. Presently, in the view of the Fed, "inflation" has been moderate. Thus there should be no great harm from a bit more "inflation" since quantitative easing will stimulate growth. By this reasoning there is no reason to not do more quantitative easing.

The next step after "dispirited" is desperation. It is our belief that the economy will continue to stagnate with creeping price inflation. It is difficult to predict how long this period will continue, but we look to things like industrial production, manufacturing, money and credit, and the real estate markets to give us an indication of the path of economic growth. Presently these indicators are negative in our book; the economic forces that would allow recovery are moving too slowly.

What this means is that during the presidential election cycle, politically sensitive economic indicators such as unemployment will remain negative. This will result in a lot of pressure on the Fed and Dr. Bernanke to "do something." Like all former Fed Chairmen, it will be hard for Dr. Bernanke to resist these calls from politicians. He will earn his moniker as "Helicopter Ben" and unleash more quantitative easing, a dangerous and regressive policy. Like most drugs it becomes less effective over time. It will further destroy real capital and delay recovery.

The best that can be thought of Ben is that he is a dogmatic fool, a failure, and a fraud. Like Obummer, he has never done an honest day's work, and refuses to learn from his mistakes. The other opinion is that he is a traitor to all but his Jewish Banker Masters.

Two words you will never hear from Soviet Central Planner Ben are "FREE MARKETS."

Lets see if this post goes through unlike the last one. Time for us at ZH to get out of the cloud as well. Market has been front running the fed since day one of Bernank-now its won with plunging yields. This is oppozite of fed's strategy which is to maintain the upward slope of yield curve. This is in spite of deztroyimg the value of the dollar. In short stated goal of inflation creating growth has failed. Now we have the banality of a recession-with the usual collapses of state and local governments that are part and parcel of every recession including the depression we've ever had. Lets not forget the end of the postal servic either! That organization has been going on and off for centuries! Of course this is worse than the depression. The freedom annihilation via the internet and through the media only allows for collapse. Should be entertaining! No jobs for anyone!!!

This is a far cry from the younger, more confident Ben Bernanke who in 2002 told Milton Friedman at his 90th birthday party that Milton was right about the Fed causing the Great Depression and "we won't do it again." Of course Milton was right about the Fed but for the wrong reasons, which could be part of our problem.

MF was wrong about the Fed. His essential claim was the Fed was too tight in GD, rev 1.0. He completely ignored the fact that keeping interest rates low (as they are now and as they were then) is a principal reason we remain mired in this mess and why Japan has been stuck for 20 years.

Ultra-low rates destroy existing (financial) capital at the same time they destroy the willingness to save AND invest. Unfortunately, raising rates will lead to immediate losses at most banks, which explains why the Bernank recoils in horror at the thought...much like Dracula recoils from sunshine.

Fortunately (or unfortunately, depending on your POV) this charade cannot continue much longer. We are rapidly depleting what's left of the capital base. When it's gone, we may continue to stagger for a while, like a Zombie, but we will eventually fall over. What happens after that is anyone's guess.

I have finally realized after 50 something years that we as a nation have become a totally dysfunctional wad of stinking crap. As a society we have rewarded the worst and penalized the people who actually do anything. Now we are a nation of takers who are not worth the trouble to keep alive. There is no incentive to work, to be responsible, to produce. Instead we are a nation of entitlement mentality who do little to nothing except finding ways to get everything for nothing.

There is no difference between the welfare dependent and people like Bernanke, Obama, Bush, etc. The values are the same. There MAY be differences in the addresses they reside at, the cloths they wear or the scale of their welfare checks.

Management, government, etc have become the parasitic class who are sucking the life out of the few remaining people who actually do anything. And, I have a feeling, those who are productive are starting to finally recognize the dead end this has all become and are opting out.

You got it so right Spiggy! Real Estate Brokers, Lawyers, Bankers etc--all APEX parasites in the scheme of things, with the entiltlement minded masses underneath. Finally, the workers and producers underneath, and the "pyramid" is upside down!

While I would agree on most counts, it makes me wonder why there are so many private companies and patents coming out of places like MIT and Cal Tech. I suspect there are some "do'ers" in these places, but I suspect that most productive folks don't stick around that long.

2 weeks ago we had a big meeting about a hughe project and when push had to come to shove, we couldn't make any progress because in the "project teams" there where only managers who had fired all their good workdrones these last 3 years and where left with one option: DIY BITCH!

I'm practicly the only manager in the team who actually know how to do stuff myself. (they have been in management since the stone age and I only for 6 years). So they all try to ride on my back. To bad I'm a asshole myself and I let them do it for 5 minutes, drop them off at 10% and give them all the attention needed to put their progress in the spotlight after I constantly say that I've started it up.

My boss knows this, and just freaking hates me for it if it wasn't for the fact that he also like to see those fuckers burn.

Idea's are good. But without the workdrones who know how to work professionally nothing gets done.

Sounds like my engineer brother at EB in Groton. Says he could do all the tasks by himself but instead a huge bureaucratic boondoggle mucks up the place---DOD government work -succulent pork at it's fattest!

You mean at the FED it started with Grünspan and Bernanke is left without workdrones. His hope politicians will help him in the job is a daydream. Conclusion: The empire will go the way of all empires-decay

Boy, talk about a FUNNY "nightmare". I mean, I don't take drugs or even drink alcohol, but this dream last night seemed just too good to be fully natural.

In the dream, straight out of "wizard of oz", we can faintly hear a mans voice coming from behind a curtain. BenBernanke and his fellow banksters are throwing levers and turning knobs, and trying to convince... then desparately prevent... a bunch of talking heads from finding out "who is the man behind the curtain". Finally the mob of reporters push the banksters aside and throw back the curtain... and find they are on a huge stage in front of a never-ending auditorium full of people and waving their arms cheering --- as they listen to Ron Paul on the stage talk about the evils of central banking, and ending the fed.

Wow, totally surreal, and a total reversal from the usual presumption. The man behind the curtain isn't the guy who pulls their strings, he's the guy they need to hide from the world so they at the fed can continue to pull the strings forever. So that's why they won't let anyone look behind the curtain!

Too bad it was just a dream. But interesting nonetheless. I wonder what it means? Yup, just wishful [subconscious] thinking. Very funny though, and cool. I woke up laughing out loud.

I wonder if Bernanke has nightmares like that? Hahahahaha! Let's hope so. Somehow, I don't think he'd wake up laughing.

People are "studying" the words of Ben Bernank as though they were chicken entrails. Or in the old Soviet days, which member of the Politburo stood next to whom. The man is paid to work for the other side. Everything the Fed has done since 1913 was to service the interests of the banksters. Viewed in that light, all their "failed" policies make total sense. Tarp, QE1, QE2, (QE?) all serve the bansters, just as all the trillions "wasted" on Iraq, Afghanistan, now Libya serve the intelligence-military-industrial complex.

I, I just, Jesus, you know? I mean, I had this idea when I was in high school that I'd start a sweet band, meet a girl and buy a Corvette... Do you, do you know what they do to you in the Fed? They put things inside me. I, I don't know what it was. Greenspan just kept laughing, and whispering in my ear that it would only sting a little. It's not even my own dick, anymore. Jamie Dimon answers his phone, I jizz myself. I fucking jizz myself. Only it burns. I haven't touched it in years. I go for a piss, I pull my arms into my shirt and I'm like 'Dude, I lost my arms in the Gulf War, can you get my dick out so I can piss?' You know how many people still fall for that? Not many, because once you've taken a man's penis out of his pants and the small face on the end that looks like a china doll says 'thank you' in a voice like a giggling little girl, you tend to tell all your fucking friends, that's how many people still fall for that.

My, my wife... they, they took her away one day. I sleep with a yellow monkey, with a woman's hands sewn on where the claws should be. I don't even think they need to make me do that as part of the plan. They just ...they just like it.

Bernank knows he's a stuffed turkey ..his admission at Jackson Hole follows the Central Bankers meeting up in Davos this year where they also admitted their policies were f'ing useless (pointless) unless the private sector took them up and ran with them

hands up out there in private business world who listens to a single speech, even a single sentence, of what any central banker says? ....cue tumbleweed ...x....x.....x .....x .....

Nobody in business, outside the crony capitalists and Govt hangers-on, gives a rats arse what Govt or its crones in central banks pontificate about like the useless windbags they are... we just step around these idiots policies like turds in the road, floaters in a pool

Bernank is a moron if he ever thought he could change anything... his academic study of the Great Depression has gone tits up, the policies have fallen flat and on deaf ears in the real economy

...nobody on Earth or in the known Universe is buying anything longer than 10 year US Govt debt. Bernank is the ONLY moron left around to buy 30 year Treasuries.. no wonder he's pissing his pants and looking ever more gaunt.. he's going to be the total retard left holding the bag which is already full of all sorts of absolute garbage from this crones Masters in DC and on Wall Street

Yes Ben, welcome to Loserville... when you read history you got the wrong end of the stick.. you can't even get the lessons of the past right, what chance you could shape the future? The Feds balance sheet looks like a shit sandwhich, you look like a complete idiot and the economy has not changed one iota for all your huffing and puffing ....your institution is a laughing stock.. take a long walk off a short pier mate

Austrian' is an ideal approach to Economic theory too, how does it deal with a re-tooling of Strategic industries, or the nationwide imbalance of income disparity?
The Central Banking response was flawed when it assumed that interest rates could be kept low thirty years out: we had too much debt and diminishing income and a mortgage crisis. The last thing the Banks should have done is asked for even more cheap liquidity, because the only person who would offer it to them...would be the FED. The same now with the ECB, who's willing to fund European Govt. at these rates?
-Bernanke has bent over backwards to pull the banks out of the morass, and every time "they're almost through" and remember what happens if we crash.. For me, the essential nature of the Federal Reserve System is that it can act both as larger than the Banking system and as a member, when the situation demands. In this situation, it should be concentrating on how to resolve the mortgage criss and the interest rate environment thirty years out. What it should not be doing is looking at an 'individual' bank which has put anomalies which never should have existed on a balance sheet in the first place. - It's a massive distraction -
And if it cannot be resolved, then there is no point in New York Fed being hegemonic.

No shit Dick Tracy they have not worked !! No Fed / monetary policy can work when they do not address the REAL price of money!

It is not really about cash flows and credit, although Mr Middleton does a greta job tracking the actual aqnd the pro forma.

When Barry the Kenyan is lock step with the left wing facsists innthe money center banks...who can trust who? No one !

It is a sham...when doe sit end? V difficult to know...good sheeple ,still think that Lil Timmy Geithner is supporting the US economy versus the UN. When will they know the truth?

Dunno...when will they brealize that the system ahs been fouled by illegal immigration....ripping of Medicare, Medicaid...you feckin name it....and then Barney Fwank et al giving them US taxpayer backing for race based mortgages, loans. student loans...etc.

The US system has been befouled. The Tea Party has shown the way back. The Black Caucus / La Raza has shown their displeasure with the way back.

Where is it going to go, and how is it going to get there? It is really very simple.

I'm afraid that I don't believe one word of our Ben's speech. It's a poorly laid bluff. If you look at how laughably the fiscal side is going -- planning to pay back a couple of trillion dollars over the next ten years with a total fiscal debt hanging at $65 trillion. So that amount of saving doesn't even pay the annual interest on the fiscal debt. The policies of both the Dems and Reps are both two steps forward and three steps back in terms of saving and spending our way out of the recession. In other words, because of continual outside financial and business interests interferring with proper and effective govt decision-making and outcomes and because the govt cannot even understand or is unwilling to properly sort the economic problems out, therefore they wont be sorted. And that only leaves more QE to buy more time (For what -- more bad decisions?) -- which means just a postponement of the inevitable.

It'll happen in the next few months because they really haven't got that much time. There will be a sudden stark economic event, which will be deliberately manipulated by the US govt to ensure that QE is brought back into play. China or someone else will typically be blamed. Fear of another crash will once again be the handy propaganda weapon of choice and the media will comply happily -- they are, after all, almost as stupid as the US citizen who reads and believes them.

So nothing much has changed really. Still right on track for continued stagflation or economic collapse. Just like Japan, who, also unsiuccessfully, used the same Keynesian debt economic strategy in the hopes of growing out of her own economic dilema. Result: 20 year of bleak stagflation. Utter failure.

Bernanke knows his roll; he is charged with offering a counter balance to the inevitable forces at hand, namely providing a 'smoothing' influence to the oncoming '"white collar" culling of the herd'. Smart people know exactly where there is fat to be cut and it no longer predominantly exists in the 'blue collar' sphere. Paradoxically, this is terrifying to the powers that be, as the 'white collars' are essentially, and understandably, sentinels of the status quo. They are fully vested into, and direct benefactors of, the system. Hence the rush to develop new consumers elsewhere.

If the numbers are negative, Obama won't get elected by people, but banks have done so well by him that he likely will win (ahem) the election anyway. There won't/can't be another Democratic contender. Ron Paul loses and all those juicy undercurrents of racism will play out in the form of a response to economic oppression. (How ironic.)

Whatever this next election is, Obama tends to open up during the campaign season because of his relationship to David Axlerod, his mentor - that's his fire, and his strongest male relationship. Geithner he just lets ride him.

He could win again, especially if he's been studying Spanish and is willing to run overtly ethnic instead of like last time where it was just a subject he'd let speak for itself.

If Big Ben can't resolve this big mess then who will? They are just delaying the inevitable the catastropic end game. No one got punished and most ppl are still unaware of the impending doom. They haven't shown any resolve regarding the ppl responsible for this financial collapse and not a single head roll on this one, if Obama is dead serious in making some omellete he gotta break some eggs. It didn't happened. The system has failed.

all he's done is bail out and prop up the 2 biggest PROBLEMS in the economy, the US Govt and Big Bwankers ...he hasn't resolved the issues, he fueled them to bigger acts of stupidity

now the bloody moron is sheepishly slding up the right end of the stick, instead of gripping the wrong end for 3 bloody years, by saying the US Govt has got to resolve its spending issue. Well fuking 'Bingo' Benny Boy, something has sunk in over 3 years while you fueled (and continue to do so) the problem and helped dig the hole even deeper!!!

Bernanke is starting to get it: the dangers of too much monetary stimulus and its cumulative effect over time. The answer wasn't in any textbook or dissertation. Gone is the hubris "We Shall Print!!". Gone is the conviction "I print therefore I am!". Gone is the notion that the 1930s were a fire drill for this depression and that monetary policy has it all figured out. That worked well on paper, not in the real world.

There's a world of rsk out there and they are beginning to see it. I don't think we get QE3 as expected.

I suppose there's a chance that Mr. Bernanke has stepped outside his comfort zone, leaving economics and into psychology.

If so, then he might come to see himself as an "enabler." I have a feeling he means well, but all he's done is enabled others (government, banks, etc) to persist in their ultimately self-destructive behaviors.

And if he continues thinking along this line, it may cause him to revisit the "economic truths" that he developed through his formitive years and holds into his adult life. Perhaps they are flawed...

But this process is so difficult -- for anyone -- because people allow themselves to become the truths they hold.